Critics of a controversial pipeline in the Amazon rainforest that has ruptured five times since its inception in 2004 are dismayed that the main public funder of the project is on the verge of giving more money for its second phase despite earlier promises to await the results of audits probing the pipeline's persistent leaks.

Last week, the Washington-based Inter-American Development Bank (IDB) signed a "mandate letter" with companies of the Peru Liquefied Natural Gas (LNG) pipeline that transports gas from the highly controversial Camisea field.

The letter kick-starts the due diligence process, a mechanism that often signals the imminent release of further loans.

The companies, led by Texas-based Hunt, SK Corporation and Repsol YPF S.A., are seeking a 400-million-dollar loan to partially fund a liquid natural gas terminal and other infrastructure on the Peruvian coast that aim to turn Peru into an exporter of liquefied natural gas.

The gas will be exported to markets in Mexico and possibly Chile and the United States as well for re-gasification.

"The Bank is considering this project based on the unique importance it represents to Peru's economic growth," the IDB said in a statement. "The LNG project is a key strategic element in Peru's overall energy plan to capitalise on its extensive gas reserves in the Camisea fields by exporting them to other markets."

But watchdog groups and environmentalists say the decision by the IDB contradicts pledges made earlier by senior officials who, responding to an uproar over the repeated spills from the gas pipeline, said they will not authorise further loans until audits have been finalised.

"Starting due diligence on this latest loan before the audit has even begun is a particularly worrying example of the bank's short-sighted decision-making that contributed to the project's problem-riddled first phase," said Simeon Tegel of the San Francisco-based Amazon Watch, a group that has long monitored the controversial project.

In March, an investigation into the Camisea pipeline by E-Tech, a California-based non-profit technical research organisation, found that the quality of materials and construction procedures used in the Camisea gas pipeline was substandard and cited that as why the pipeline continued to spill into the ecologically sensitive area.

The report and the spills prompted the commissioning of two audits. The first will be by the IDB and is slated to probe the social and environmental impacts of Camisea, while the other will be undertaken by the Peruvian government and is looking at the trans-Andean pipeline taking Camisea's gas from the Amazon rainforest to the Peruvian coast.

But watchdog groups, which initially warned that the audits may not go far enough in stopping damage by the project, are now further alarmed that the IDB would agree to the due diligence process at this stage.

They say that the audits are likely to detect further construction problems in the pipeline and that the bank should wait until the results are made public.

"It seems highly improbable that a comprehensive and independent audit of the social and environmental impacts of the first phase of Camisea would give it a clean bill of health," Tegel said.

The Camisea natural gas project is one of Latin America's key energy infrastructure projects, involving the extraction, transportation, and distribution of natural gas for domestic consumption and export.

It is operated by Transportadora de Gas del Per˙ (TGP), a consortium that includes Argentina's Pluspetrol and Techint, Texas-based Hunt Oil, Algeria's state-controlled Sonatrach and South Korea's SK Corp.

The 1.6-billion-dollar original project is based in a remote, ecologically fragile tropical area, the Lower Urubamba Valley of the Peruvian Amazon, and critics say it has a high risk of degrading pristine areas with valuable biodiversity.

Its social impacts have been criticised for the involuntary resettlement involved, the destruction of food and water supplies of local communities, and the exposure of voluntarily isolated indigenous peoples to illnesses for which they have no immunological defences.

During a U.S. congressional hearing on Jul. 12, Carlos Herrera Descalzi, former minister of energy and mines in Peru, criticised the project and said the new aim of exporting gas from the area stood at odds with the original objective of supplying the local market with cheap and affordable energy.

The former minister told the U.S. senators, who oversee U.S. funding for multilateral financial institutions such as the World Bank and the IDB, that mismanagement of the project "will certainly bring problems for the future; indeed, it has already caused problems: the credibility of government -- and also of institutions like IDB -- is in question".

The IDB, however, insists that the project is good for the Peruvian economy and for energy production in Latin America in general and that the due diligence does not immediately mean more funds. The bank says that the decision to finance the Peru LNG project is subject to approval by the IDB's board of directors.

The public lender estimates that the project will generate 800 million dollars in annual hard currency revenues to Peru, "increasing the country's total exports by an estimated 1.5 percent and transforming Peru into a net hydrocarbons exporter in the medium term."

"The entire project is expected to yield 4.8 billion dollars in net present value terms in cumulative economic benefits, or an amount equivalent to six percent of Peru's GDP (Gross Domestic Product) in 2005," the IDB said in a statement.

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